USING KEY PERFORMANCE INDICATORS TO FACILITATE

THE STRATEGY IMPLEMENTATION AND BUSINESS

PROCESS IMPROVEMENT IN SME’S

Miguel Merino Gil and David Neila Sousa

Department Enterprise Organization, University of Vigo, Campus Lagoas-Marcosende, Vigo, Spain

Keywords: KPI’s Performance Metrics, Strategy Monitoring, SME’s Performance Control, Industrial Benchmarking.

Abstract: The use of metrics for a wide range of issues in business management is usual in big organizations but don’t

use frequently in business in small size enterprises. Business Intelligence (BI) is seen largely as the domain

of large organizations, yet any size business can benefit greatly from BI tools. To date, the cost of BI

technology has been too high for small businesses and limited scope of market operations and financial

reports. We develop a method for successful BI implementation in the SME'S on the basis of its

performance indicators based upon business process monitoring and constructing a plan of action (Business

Initiatives) to carry out a defined strategy by targeted objectives.

1 INTRODUCTION

In their book, "The Strategy-Focused Organization:

How Balanced Scorecard Companies Thrive in the

New Business Environment," Robert Kaplan and

David Norton estimate that fewer than 20% of

businesses execute their business strategies

effectively.(Kaplan, 2001).

This principle would be much more severe if it is

applied to the SME’s for which it is difficult to

know the drivers to transform strategy in action.

Usually in this type of organizations, the corporate

performance monitoring was based upon planning

and financial metrics, that do not have critical issue

for SME managers because they use frequently the

direct monitoring due the small complexity of the

matter. On the contrary the managers spend more

time in operational performance monitoring, close to

the main organizational direct objectives, like

efficiency of products or services, than strategy

control.

Despite decades of investments in business

intelligence, most organizations still struggle to

execute on their business strategies. Strategies are

intended to focus everyone's attention on what to do;

but, in many cases, they are inadequately created,

poorly communicated and badly measured. “The

align-to-action process is aimed at helping

organizations synchronize their strategic and tactical

activities, and better execute their strategies. Most

organizations continue to produce their key financial

reports (such as the three core financial statements

— profit and loss [P&L], balance sheet and cash

flow forecast), as well as a raft of management

reports via manually intensive processes”.

(Chandler, 2009).

“Business managers have often fought long and

hard to achieve organizational efficiencies through a

functional structure, and they don't want to risk

losing these benefits as they explore new ways of

improving organizational effectiveness. The

challenge for managers is to hold on to the

efficiency gains a functional structure provides,

while still exploring the opportunities for

effectiveness a process focus can give”. (Smith,

2007).

The SME’s functional structure is simplest than

the bigger enterprises and many are process

oriented.

“The most successful companies demonstrate

significant market share growth. A well-rounded set

of KPI’s involving financial, customer, process and

organizational measures yields higher performance

in areas such “time to market” and “customer

satisfaction/retention”. Improvements in these and

other key performance areas drive market share

performance and overall growth”. (Hatch, 2009)

This paper is organised in the following

arrangement:

In the first place look at the fundamentals of the

193

Merino Gil M. and Neila Sousa D. (2010).

USING KEY PERFORMANCE INDICATORS TO FACILITATE THE STRATEGY IMPLEMENTATION AND BUSINESS PROCESS IMPROVEMENT IN

SME’S.

In Proceedings of the 12th International Conference on Enterprise Information Systems - Artiﬁcial Intelligence and Decision Support Systems, pages

193-197

DOI: 10.5220/0002886501930197

 SciTePress

strategy initiatives developed from the strategic

maps, as the way of turning the strategy in action.

Then we will analyze the use of Benchmarking to

identify the performance indicators (metric) in the

SME'S.

In the point 3 and on the basis of the Gartner

Business Value Model, we specified its application

to the case of an SME belonging to a specific

industrial sector. Define its overall strategy and

objectives and its "strategic map". The business

processes are defined in from the Business Aspects

of the model of Gartner and the performance

indicators to control them. Then be linked these

indicators with the strategic objectives

Finally be derived from these links, business

initiatives that will be the way of setting up the

strategy and that should be consistent with the

strategic objectives raised, with which demonstrate

the feasibility of the method followed.

2 STRATEGY MAPS IN SME’S

The strategy map describes the logic of the strategy,

showing clearly the objectives for the critical

internal process that create value and the intangible

assets required to support them. The Balanced

Scorecard translate the strategy map objectives into

measures and targets. The organization must launch

a set of action programs that will enable the targets

for all measures to be achieved. Kaplan and Norton

“Strategy Maps” refers these action programs as

strategic initiatives. (Kaplan, 2004)

2.1 Strategic Initiatives

The first problem finding is to define what are the

strategic initiatives for a SME. The Kaplan and

Norton “Strategy Maps” are oriented to define

financial metrics trough four perspectives Financial,

Customer, Internal and Learning and Growth,

determining a perfect causal link but easily break

down in SME’s organizations. According to Kaplan

and Norton, only 25% of organizations link

incentive compensation to strategy, only 40% link

budgets to strategy, and only 5% of employees

understand how their position affects the

organization’s strategy. Thereby we find an

alternative model developed Gartner, that establish

a coherent set of objectives that integrate all the

"activities" (structures, systems and processes) to

achieve that statement.

We use the concept, and well know theory of

Business Process Management (BPM) for relate the

business process with strategy, because the last one

are better understanding for middle level managers

in SME’s that are responsibles for conduct and

ensure implementation of strategy initiatives from

senior executives decisions.

Based on “APQC's Process Classification

Framework” (APQC, 2008), is possible to conduct a

business process taxonomy that defines the steps or

activities that make up the major processes and sub-

processes used in the organization, in order to

establish a set of performance metrics.

2.2 Identify SME Case Metrics from

Benchmarking Process

The Benchmarking analysis method is a basic

tool for help to fix quantitatives and qualitatives

objectives and metrics for an industrial sector.

These analysis have a double approach.

From normalized metrics , the companies show

their reports and ratios throughout public entities or

official registry whose information are mainly of

financial nature and oriented to serve information for

stakeholders. The possible benchmarking analysis in

this case is easily from Specialized Data Base

(FINTEL Industry Metrics; Moody’s Financial

Metrics; Deloitte: The Shift Index; ….) and small

cost, but also small effectiveness for SME’s. The

reason is the financial data latency and final oriented

information results not causal effects.

A second approach for benchmarking is

focalized to SME’s competitiveness analysis and

based upon core competencies. This type of

companies is characterized by a great flexibility and

adaptability to markets and environmental factors,

therefore the performance of its activities is a critical

success factor and should be subject to a follow-up

next and most accurate as possible. On the other

hand, if your strategy is based on the growth in

another sector or other types of customer, will need

to take into account the possible development of

skills and competencies, necessary, as well as the

precise indicators to control them. The

benchmarking in these cases is much more difficult

to obtain, because it is of indicators internal process

that are not published and with a rapid evolution to

adapt to changing market conditions. In addition

require specific studies by sectors, industry,

countries, etc. that is costly in time and money, and

that are offered frequently By companies

specialising in this type of studies (Gartner;

Forrester; …).

One way to address the problem is through

industry metrics snapshot from prestige publications

those of APQC that allows a company to easily

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benchmark its corporate performance against peers

in the industry. The snapshot illustrates nearly two

dozen metrics spanning six categories of operational

performance including sales, efficiency,

effectiveness, profitability, cash and earnings – all

driving shareholder value.

A company can assess its performance in each

metric against the industry average, determine where

it specifically falls among the lower, median and

upper quartiles, and identify the worst-in-class and

best-in-class performers.

Table 1: Industry metrics snapshot.

Business Aspects Metric

Sales

Performance

-Revenue Growth (%,LTM)

-Revenue Growth (%,5-yr)

Efficiency

Performance

(LTM)

-Revenue P/Employee

-Net Income P/ Employee

- SG&A Expense Rate

- R&D Expense Rate

- Asset Turnover (R/ LTM)

- Inventory Turnover

Effectiveness

Performance

(LTM)

-Return on Assets (%)

-Return on Capital (%)

-Return on Equity (%)

Profitability

Performance

-Gross Profit Margin (%, -LTM)

-Gross Profit Margin Growth (%, 5-yr)

-Operating Income Margin (%, LTM)

-Net Income Margin (%, LTM)

-Net Income Margin Growth (%, 5-yr)

Cash Performance

-Free Operating Cash Flow Margin (%, LTM)

-Days Sales Outstanding (DSO) (Days, LTM)

-Cash Flow Growth (%, 5-yr) -Current Ratio

(Ratio, LFY)

Earnings

performance

-EPS (Excluding Extr. Items) ($/Share, LTM)

-EPS Growth (Excluding Extr. Items) (%, 5-yr)

-P/E Ratio (Excluding Extr. Items) (Ratio, LTM)

Source: QlikTech metrics snapshot, 2007

3 USING BUSINESS METRICS IN

INDUSTRIAL SME’S

The scope of the standard measures contained in the

Gartner Business Value Model covers all the

controllable activities performed within an

organization. These activities center on three broad

categories, referred to as business aspects:

Table 2: Business Value Model High-Level Business

Aspect Definitions (Smith, 2006).

Demand

Management

All the actionable activities involved with

generating demand for the products and

services offered by the organization.

Supply

Management

All the actionable activities directly involved

with supplying the products and services

offered by the organization.

Support

Services

All other actionable activities involved with

supporting the organization. These services

operate within organizations by providing

services to internal clients.

Source: Gartner Value Model. 2006

3.1 Use of Industrial Metrics in SME

Machinery Building Sector

A manufacturer of equipment in the automotive

industry, originates from a normal way, on the basis

of subcontracting by a company manufacturer or

supplier of first level (tier 1) in the sector.

This initial phase requires to orient the business

toward the intensive use in engineering and the

exploitation of skills specific techniques, having less

impact the commercial activity, with low number of

customers.

A later stage is characterized by the growth

based on a standardization of the product, a

optimization of the processes of supply, manufacture

and distribution and expand greatly the number of

customers, which involves a more commercial

activity of marketing, sales and customer service. It

is essentially to increase the value creation through

the processes that constitute the know-how of the

company, and to withstand a strategy given.

- Company name example (We use a fictitious name

to preserve the confidentiality):

Técnicas Industriales Especializadas S.L. (TIE)

- Activity: Engineering and specialized industrial

machinery building

- Business Strategy: Growth through expanding the

range of products and services, highly specialized

and adapted to the customer, with a reasonable

standardization and at a competitive price.

Strategy objectives (defined through interview with

the CEO of the organization):

1. Loyalty to the main customers

2. Design the best offer products and services through

options pre-configured

3. Improve the operational efficiency (supply;

assembly; warehousing; distribution)

4. Increase the work capital available

5. Improve the customer service and

operational margin

6. Create an Image of Mark (Brand)

We search build a set of Business Initiatives that can

create value to satisfy the Business Strategy.

We begin linking performance metrics with

strategy objectives following the strategy map model

in order to establish a cause-and-effect relationships

(in accordance with Kaplan and Norton model).

The metrics of performance must be focusing on

the actionable activities within the enterprise that are

managed at the executive and middle management

levels. The holistic nature of the Business Value

Model should capture the cause-and-effect

relationships between business functions within the

enterprise, to ensure that all the effects of a specific

change are considered.

USING KEY PERFORMANCE INDICATORS TO FACILITATE THE STRATEGY IMPLEMENTATION AND

BUSINESS PROCESS IMPROVEMENT IN SME'S

195

Figure 1: TIE Strategy Map Model.

The prime metrics should be selected based on

general availability of the data required to support

them in automated business transaction systems.

Regrouping according to the 3 Business Aspects

of the Business Value Model (Demand

Management; Supply Management; Support

Services), in addition to a fourth, due to the

relevance is for this company (Engineering), are

selected indicators of process needed to carry out the

strategy, according to the following table:

Table 3: Relationship between Business aspects and

performance indicators.

Business Aspects Performance Indicators

DEMAND MANAGEMENT

(Comercial and Sales)

-Product Portfolio index

-Sales Cycle index

-Sales Close index

-Customer Retention index

-Sales by Customer index

-Chanel Profitability index

-Activity in Company Portal

-Sales by Product Type

-Payoff by Product

-Profitability by Product index

-On-Time Delivery

SUPPLY MANAGEMENT

-Order Fill Rate

-Impacts Assembly index

-Warehousing Cost per unit

-Inventory Turnover

-Supplier On-Time

-Delivery Material

-Quality Supply Service

- Service Accuracy

-Conversion Cost

-Asset Utilization

-Cash-to-Cash Cycle Time

CUSTOMER SERVICE

-Service level effectiveness

-Time to Service index

-Total Cost index

ENGINEERING

-New Products index

-New Ideas Available index

-Configurability index

By having a pre-defined set of metrics that can be

used to translate vision to action. In this example, an

industrial machinery building company has defined

a high-level strategy to grow the business by

delivering customized pre-configured products and

services and at a reasonable price. By having a pre-

defined set of performance metrics, the management

team can more rapidly focus on the specific business

elements necessary to achieve the strategy and

formulate tactical plans to improve them. We will

consider the mainly strategic implications of follow-

up to these indicators.

Performance metrics facilitate strategy execution

creating a set of Business Initiatives or actions

adequate to meet targeted objectives:

-Develop a Web-based order fulfillment process

tied to preconfigured product options

-Creating a new commercialization channel

-Creating a new warehouse for commodities

-Establish relationships with new partners in each

of the areas

-Development of a production system for

standardized products

Table 4: Performance Metrics Facilitate Strategy

Execution.

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4 CONCLUSIONS

The use of BI tools and performance metrics in is

especially suitable in SME strategy growth

processes. The model developed by Gartner must be

very effective in most of the cases to implement the

theories of Kaplan and Norton in regard to the

establishment of strategic maps in the SME'S, and

especially in the industrial environments, where the

financial metrics are less value.

It is a critical success factor growth based on the

development of an offer well suited to the customer

and the creation of a brand image, for which the use

of new technologies based on the Internet is crucial.

Although there have been obtained even results

for the implementation of this method to the SME

analyzed due to the time required for an analysis

conclusively, it has been reached an agreement with

the CEO to implement the system of measures and

initiatives to help carry out the strategy defined, with

which it sense satisfactory results in the medium

term.

Finally the use of performance indicators based

on the activities of business, can provide a critical

path for the development of the strategies, which

Gartner called "Business Initiatives".

This first analysis to develop currently in a

specific industrial sector, will be subject to spread to

other sectors that validated the adequacy of the

model.

REFERENCES

Robert S. Kaplan and David P. Norton, The Strategy

Focused Organization: How Balanced Scorecard

Companies Thrive in the New Business Environment,

Harvard Business School Press, 2001

Robert S. Kaplan and David P. Norton, Strategy Maps,

Harvard Business School Press, 2004

Michael Smith, Audrey L. Apfel, Richard Mitchell, The

Gartner Business Value Model: A Framework for

Measuring Business Performance, Gartner Research,

May 2006

Michael Smith, Bill Gassman, John E. Van Decker, Using

Key Performance Indicators to Facilitate Business

Process Improvement, ID Number: G00146727,

Gartner Research, March 2007

QlikTech, Industry Metrics Snapshot for Industrial

Machinery, QlikTech International AB, 2007

APQC, The Framework for Process Improvement, APQC

Organization, April 2008

David Hatch, Performance Management AXIS, Aberdeen

Group, QI 2009

Neil Chandler, Top Four Corporate Performance Mana-

gement Processes for 2009 to 2014, Gartner Research,

September 2009

USING KEY PERFORMANCE INDICATORS TO FACILITATE THE STRATEGY IMPLEMENTATION AND

BUSINESS PROCESS IMPROVEMENT IN SME'S

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